Falling food prices cement its view on Aug rate cut: BofA-ML

A fall in food inflation in May, better monsoon prospects and the ongoing rupee appreciation lowering inflation will help the Reserve Bank to deliver a 0.25 percent rate cut in August, a report said on Thursday.  

Mumbai: A fall in food inflation in May, better monsoon prospects and the ongoing rupee appreciation lowering inflation will help the Reserve Bank to deliver a 0.25 percent rate cut in August, a report said on Thursday.

Acknowledging that it is a "contrarian call", analysts at Bank of America Merill Lynch (BofA-ML) said daily data show that food inflation has continued to trend lower in May on a good summer rabi harvest, which will help contain overall inflation under 4 per cent for the first half of 2017.

"Based on sowing data, we've been expecting bigger oilseed (6 percent growth) and pulses (11 percent) rabi summer crops that will pull down prices," the brokerage said.

Sugar prices will also be suppressed on easing of stock holding limits and removal of import duty even though the acreage is lower, it added.

The Met Department is more confident of its forecast for 96 percent of normal rainfall with the El Nino weather pattern likely to be delayed, it said.

But a private weather forecaster today reiterated its view of a below par rains this year.

A stronger rupee, coupled with the oil price rally losing steam, is cutting the risk of imported inflation, the American brokerage said.

The Reserve Bank is targeting to bring down inflation closer to 4 percent, the median of the target set for it by government in the medium term.

It shifted the policy stance from "accommodative" to "neutral" earlier this year after inflation started inching up. The central bank said it expects the benefits of the lower base effect to wear-off in the second half of the current financial year.

This has led many analysts to dismiss possibilities of more cuts in the rates and most of them are forecasting a status quo in rates from RBI, as it had done at the last policy review in April.